Very often, liability can be reduced or the financial and operational goals of business owners can be better achieved by changing a company’s legal structure, e.g., general partnership (GP) to limited liability partnership (LLP), for-profit corporation to non-profit corporation, corporation to limited liability company (LLC), etc. There are a number of ways a company can change its structure. Consider the following brief summary of the more widely used methods for transforming companies…
At times, a transformation can be achieved without the separate transfer of assets or ownership interests.
- Conversion. In recent years, a variety of one-step conversion approaches to transformation have become available. A conversion makes it possible for a company to transform itself by a single and simple filing. A common example is the conversion of a GP into an LLP. A significant advantage of such a conversion is that the LLP provides a liability shield, whereas partners of a GP face unlimited personal liability for partnership debts.
- Merger. A merger is a very traditional way of transforming a business. However, unlike a conversion, a merger involves two existing companies. Most typically, one company “absorbs” the other and the “absorbing” company acquires all the rights and interests of the company being absorbed.
Where a one-step transformation is unavailable or undesirable, a similar result can be reached by transferring the assets or ownership interests of an “old” company into a “new” company.
- Assets-Over. In an “assets-over” approach, the old company transfers all of its assets and liabilities to a new company in exchange for ownership interests in the new entity, with the old company then making a liquidating distribution of those ownership interests to the owners of the old company.
- Assets-Up. In an “assets-up” approach, the old company liquidates first, and its owners contribute the assets and liabilities of the old company they receive to the new company in exchange for the ownership interests of the new company.
- Interests-Over. In an “interests-over” approach, the ownership interests in the old company are contributed to the new company, and the old company is then liquidated.
Tax Only Reclassifications…
Partnerships and LLCs can choose how their income will be taxed. For example, an LLC can elect to be taxed as a Subchapter C or S corporation with a simple filing. Tax transformations are controlled by federal tax law and normally do not change the state law characteristics of the company (e.g., management, liability protection, transfer of ownership, etc.).
In most cases, a transformation will require or result in the creation of a new legal entity. As such, additional steps may be required to complete the transformation, for example, assigning leases and other contracts, amending or acquiring new insurance policies, establishing new bank accounts, obtaining new tax identification numbers, transferring or obtaining new business licenses, etc. Where real property is involved, a transformation may trigger land use and environmental concerns, require conveying property by deed, and necessitate amending or acquiring new title insurance policies, too.
Changing the legal structure of a business can offer great advantages, but it can have significant negative consequences as well. Thus, it is prudent to obtain competent legal and tax advice when considering a business transformation.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, Suite 102
Springfield, New Jersey 07081
DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.